The Attractions And Hidden Costs of Serviced Apartments

The Attractions And Hidden Costs of Serviced Apartments

Attractions And Hidden Costs of Serviced Apartments

At RM120,000 the 1-bedroom serviced apartment in the heart of Kuala Lumpur seems like a dream investment for Lee. Her office is close by and although the unit is only a modest 400 sq ft, Lee, an executive, is not put off – she is single and does not need a lot of space. And should she decide not to stay in the unit, she could always go for the leaseback option offered by the developer.

Lee is among the increasing number of property investors who buy serviced apartments, as attested by developers of several serviced apartments who tell City & Country that many of their buyers are owner-occupiers. One developer says that about 70 per cent of his buyers are owner-occupiers. Given the growing demand, it is little wonder then that developers with commercial land are watching this segment of the market like hawks.

Unlike apartments and condominiums, serviced apartments are built on land with commercial status. Since the commercial subsector of the property market is not very exciting these days, building serviced apartments instead of shop offices and the like would seem like a good bet.

There are serviced apartments and there are serviced apartments. Since Kuala Lumpur’s maiden serviced apartment development – the 240-unit Micasa Hotel Apartments along Jalan Tun Razak was completed in 1988 – there are now some 8,642 units scattered both within the city centre and in the suburbs. The Residential Property Stock Report (3Q 2002) by the National Property Information Centre indicates that during the period under review, 986 units were under construction while work on another 120 units started. In addition to that, the authorities approved the building of yet another 208 units.

While serviced apartments started off catering to the business traveller and the expatriate, they are also now popular with tourists. Thus developers’ targeting of investors who are open to leaseback schemes tied to the sale.

Of late however, a new breed of serviced apartments has entered the scene. Simply identified by the market as “serviced residences”, this property type is also targeted at owner-occupiers. Unlike most serviced apartments which are often found within the city centre, these serviced residences are mushrooming in the suburbs like Sri Hartamas, Mont’Kiara, Petaling Jaya and Shah Alam.

While these properties may appear to be an attractive option for prospective homeowners – like Lee – there are underlying differences between owning a serviced apartment and an apartment and it pays to be in the know.

Serviced apartments, for example, carry certain “hidden costs” like higher utility charges. Their development is also not governed by the Housing Development Act.

Side stepping the Housing Development Act?

Zerin Properties CEO Previndran Singhe suspects that developers are selling residential-based properties as serviced apartments as a way around the strict rules and guidelines of the Housing Development Act (HDA).

But Malaysia Land Properties Sdn Bhd (Mayland) general manager Eva Hui disagrees, arguing that “developers have to look at the location factor and that although the land may have a commercial title, it does not mean that they have to build an office building”. (Mayland, a member of the Hong Kong-based Far East Consortium Group, has several serviced apartment projects in the Klang Valley and Johor Baru.)

“We use location to decide on the product K [and] when we buy land we look at location which is why we focus on areas like Sri Hartamas or the city centre,” Hui says. Apart from serviced apartments, the company is also developing landed and strata housing and shop units.

Previndran stays unconvinced. He maintains that developers go for serviced apartments to avoid the HDA. “The developers [of serviced apartments] do not have to get a Housing Developers Licence, apply for the Advertising Permit and Housing Developers Account before launching and collecting deposits and payments. In the HDA, there is a compulsory adoption of the standard sale and purchase (S&P) agreement under schedule G and H. There is no scope for any negotiations on the terms and conditions. Also in the HDA no bookings can be collected, only the 10 per cent deposit K the timing for the completion is also strictly governed,” he argues.

Developers of serviced apartments contacted by City & Country, meanwhile, say although they are not bound by HDA regulations, they do adopt some of the rules. The developer of a serviced apartment in Shah Alam says in their case, the S&P is modelled as far as possible after the HDA. He, requesting anonymity, concedes that they do not follow it strictly. “Before the amendment to the act [HDA], buyers of projects that were abandoned were not given a refund for money paid, but we included that [clause] in our S&P agreement,” he continues.

As far as Previndran is concerned, prospective buyers should pay attention to the S&P agreement and its terms. His advice: Ensure that the S&P is equitable for both parties K there is no such thing as a standard S&P agreement. Details like the completion time, available recourse if the development is delayed, duration of the defects liability period and the setting up of the management corporation must be taken note of.

Hidden costs?

Prospective investors of serviced apartments should take note that they are technically commercial properties and the water and electricity charges are therefore levied accordingly.

While this has put off some prospective buyers, a developer in Shah Alam says it has discussed with Tenaga Nasional Bhd for the electricity charges of its current development to be based on a residential property. “We have received indication that the rates will be similar to residential property,” he says.

Property consultants point out that besides the higher utility bills, owners of serviced apartments are also slapped with higher assessment charges and quit rent. According to Previndran, quit rent in Kuala Lumpur is calculated at 65 sen psm for residential land and RM4 psm for commercial land. The assessment charges for residential and commercial property, meanwhile, are calculated at 6.0 and 12 per cent of the annual value, respectively. (This means owners of condominiums in the pricey Bangsar or Mont’Kiara area will probably pay higher assessment fees than those of serviced apartments in, for instance, Shah Alam.)

DTZ’s Koh says car parks may not be sold as part of the accessory parcel in serviced apartments, so parking charges may be levied. Most developers charge housekeeping and laundry service on a pay-per-use basis.

Property management

In any strata housing development, property management – involving the maintenance of common property and ensuring a growth of the capital value of the property – is key.

In the case of Mayland’s serviced apartments, Hui assures buyers that they have nothing to worry about as both the management and maintenance are undertaken by Dorsett Hotel International – a chain owned by the Far East Consortium Group.

Besides managing the Dorsett Regency Hotel on Jalan Imbi, Kuala Lumpur, Dorsett Hotel International is behind the management of all of Far East Consortium Group’s serviced apartments worldwide.

Managing a serviced apartment development and providing the full range of housekeeping services is not an easy task, Hui stresses, adding that a developer with no experience may find it difficult to provide good service.

Similar to a strata housing development, the owners have to set up a management corporation upon issuance of the strata title. “If at the end of the day they decide that they do not want Dorsett [Hotel International] they can ask other property managers to manage the property�K but whether the latter can provide the services is another matter,” she adds.

Seeking recourse

In January this year, Housing and Local Government Minister Datuk Seri Ong Ka Ting said although serviced apartments were not governed by the Housing Development Act, the ministry would help mediate between buyers, developers and local authorities if any problems arise.
In the meantime, DTZ’s Koh says an avenue for buyers to seek recourse would be via the courts, as is the case for any commercial property.

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